Question 1

Briefly explain what is meant by put-call parity?

Accepted Answer

The relationship between the value of a European call option and the value of an equivalent put option is called put-call parity. It shows that the payoff from purchasing a call option, and investing the present value of its exercise price, equals the payoff from buying the stock and buying a put option on the stock. Since these two payoffs at expiration are equal, it must cost the same to establish both positions. This equivalence in cost to establish the positions is called put-call parity.

Question 2

If the stock price follows a random walk, successive price changes are statistically independent. If σ2 is the variance of the daily price change, and there are t days until expiration, the variance of the cumulative price change is

Accepted Answer

A) σ2 
B) (σ2)× (t). 
C) (σ2)/t. 
D) (σ2)× (t2). 
A) σ2 
B) (σ2)× (t). 
C) (σ2)/t. 
D) (σ2)× (t2). B

Question 3

Call options can have a positive value at expiration even when the underlying stock is worthless.

Accepted Answer

A) True 
 B)False  False

Question 4

The two principal options exchanges in the United States are the:
I.International Securities Exchange;
II.New York Stock Exchange;
III.NASDAQ;
IV.Chicago Board of Options Exchange

Accepted Answer

A) II and III only 
B) I and II only 
C) I and IV only 
D) III and IV only 
A) II and III only 
B) I and II only 
C) I and IV only 
D) III and IV only

Question 5

An increase in exercise price results in an equal increase in the call option's price.

Accepted Answer

A) True 
 B)False

Question 6

The buyer of a call option has the right to exercise the option, but the writer of the call option has the

Accepted Answer

A) choice to offset with a put option upon exercise. 
B) obligation to deliver the shares at the exercise price. 
C) choice to deliver shares or take a cash payoff. 
D) obligation to deliver a put option upon exercise. 
A) choice to offset with a put option upon exercise. 
B) obligation to deliver the shares at the exercise price. 
C) choice to deliver shares or take a cash payoff. 
D) obligation to deliver a put option upon exercise.

Question 7

Buying the stock and the put option on the stock provides the same payoff as

Accepted Answer

A) investing the present value of the exercise price in T-bills and buying the call option on the stock. 
B) short-selling the stock and buying a call option on the stock. 
C) writing (selling)a put option and buying a call option on the stock. 
D) a T-bill. 
A) investing the present value of the exercise price in T-bills and buying the call option on the stock. 
B) short-selling the stock and buying a call option on the stock. 
C) writing (selling)a put option and buying a call option on the stock. 
D) a T-bill.

Question 8

An option that can be exercised any time before its expiration date is called:

Accepted Answer

A) a European option. 
B) an American option. 
C) a call option. 
D) a put option. 
A) a European option. 
B) an American option. 
C) a call option. 
D) a put option.

Question 9

For a European option: Value of call + PV(exercise price)= Value of put + Share price.

Accepted Answer

A) True 
 B)False

Question 10

The owner of a regular exchange-listed call-option on a stock

Accepted Answer

A) has the right to buy 100 shares of the underlying stock at the exercise price. 
B) has the right to sell 100 shares of the underlying stock at the exercise price. 
C) has the obligation to buy 100 shares of the underlying stock at the exercise price. 
D) has the obligation to sell 100 shares of the underlying stock at the exercise price. 
A) has the right to buy 100 shares of the underlying stock at the exercise price. 
B) has the right to sell 100 shares of the underlying stock at the exercise price. 
C) has the obligation to buy 100 shares of the underlying stock at the exercise price. 
D) has the obligation to sell 100 shares of the underlying stock at the exercise price.

Question 11

Which of the following features increase(s)the value of a call option?
I.A high interest rate;
II.A long time to maturity;
III.A higher volatility of the underlying stock price

Accepted Answer

A) I only 
B) II only 
C) III only 
D) I, II, and III 
A) I only 
B) II only 
C) III only 
D) I, II, and III

Question 12

Suppose the underlying stock pays a dividend before the expiration of options on that stock. This will:
I.increase the value of a call option;
II.increase the value of a put option;
III.decrease the value of a call option;
IV.decrease the value of a put option

Accepted Answer

A) I and II only 
B) III and IV only 
C) I and IV only 
D) II and III only 
A) I and II only 
B) III and IV only 
C) I and IV only 
D) II and III only

Question 13

Consider the following data for a European option: Expiration = 6 months; Stock price = $80; Exercise price = $75; Call option price = $12; Risk-free rate = 5 percent per year. Using put-call parity, calculate the price of a put option having the same exercise price and expiration date.

Accepted Answer

A) $3.07 
B) $5.19 
C) $11.43 
D) $3.42 
A) $3.07 
B) $5.19 
C) $11.43 
D) $3.42

Question 14

The writer of a put option loses if the stock price declines.

Accepted Answer

A) True 
 B)False

Question 15

If the risk-free interest rate increases, then

Accepted Answer

A) call option prices increase. 
B) call option prices decrease. 
C) call option prices remain the same. 
D) call option prices can either increase, decrease, or remain the same. 
A) call option prices increase. 
B) call option prices decrease. 
C) call option prices remain the same. 
D) call option prices can either increase, decrease, or remain the same.

Question 16

For European options, the value of a call plus the present value of the exercise price is equal to

Accepted Answer

A) the value of a put minus the value of a share. 
B) the value of a share minus the value of a call. 
C) the value of a put plus the value of a share. 
D) the value of a share minus the value of a put. 
A) the value of a put minus the value of a share. 
B) the value of a share minus the value of a call. 
C) the value of a put plus the value of a share. 
D) the value of a share minus the value of a put.

Question 17

Suppose you buy a call and lend the present value of its exercise price. You could match the payoffs of this strategy by

Accepted Answer

A) buying the underlying stock and selling a call. 
B) selling a put and lending the present value of the exercise price. 
C) buying the underlying stock and buying a put. 
D) buying the underlying stock and selling a put. 
A) buying the underlying stock and selling a call. 
B) selling a put and lending the present value of the exercise price. 
C) buying the underlying stock and buying a put. 
D) buying the underlying stock and selling a put.

Question 18

The writer (seller)of a regular exchange-listed put-option on a stock

Accepted Answer

A) has the right to buy 100 shares of the underlying stock at the exercise price. 
B) has the right to sell 100 shares of the underlying stock at the exercise price. 
C) has the obligation to buy 100 shares of the underlying stock at the exercise price. 
D) has the obligation to sell 100 shares of the underlying stock at the exercise price. 
A) has the right to buy 100 shares of the underlying stock at the exercise price. 
B) has the right to sell 100 shares of the underlying stock at the exercise price. 
C) has the obligation to buy 100 shares of the underlying stock at the exercise price. 
D) has the obligation to sell 100 shares of the underlying stock at the exercise price.

Question 19

Briefly explain what is meant by protective put.

Accepted Answer

The combination of a stock and a put opt

Question 20

In June 2020, an investor buys a put option on Genentech stock with an exercise price of $75 and expiring in January 2022. If the stock price in July 2020 is $80, then this option is
I.in-the-money
II.out-of-the-money
III.a LEAPS option

Accepted Answer

A) I only 
B) II only 
C) III only 
D) II and III only 
A) I only 
B) II only 
C) III only 
D) II and III only

Exam 20: Understanding Options

Briefly explain what is meant by put-call parity?

If the stock price follows a random walk, successive price changes are statistically independent. If σ2 is the variance of the daily price change, and there are t days until expiration, the variance of the cumulative price change is

Call options can have a positive value at expiration even when the underlying stock is worthless.

The two principal options exchanges in the United States are the: I.International Securities Exchange; II.New York Stock Exchange; III.NASDAQ; IV.Chicago Board of Options Exchange

An increase in exercise price results in an equal increase in the call option's price.

The buyer of a call option has the right to exercise the option, but the writer of the call option has the

Buying the stock and the put option on the stock provides the same payoff as

An option that can be exercised any time before its expiration date is called:

For a European option: Value of call + PV(exercise price)= Value of put + Share price.

The owner of a regular exchange-listed call-option on a stock

Which of the following features increase(s)the value of a call option? I.A high interest rate; II.A long time to maturity; III.A higher volatility of the underlying stock price

Suppose the underlying stock pays a dividend before the expiration of options on that stock. This will: I.increase the value of a call option; II.increase the value of a put option; III.decrease the value of a call option; IV.decrease the value of a put option

Consider the following data for a European option: Expiration = 6 months; Stock price = $80; Exercise price = $75; Call option price = $12; Risk-free rate = 5 percent per year. Using put-call parity, calculate the price of a put option having the same exercise price and expiration date.

The writer of a put option loses if the stock price declines.

If the risk-free interest rate increases, then

For European options, the value of a call plus the present value of the exercise price is equal to

Suppose you buy a call and lend the present value of its exercise price. You could match the payoffs of this strategy by

The writer (seller)of a regular exchange-listed put-option on a stock

Briefly explain what is meant by protective put.

In June 2020, an investor buys a put option on Genentech stock with an exercise price of $75 and expiring in January 2022. If the stock price in July 2020 is $80, then this option is I.in-the-money II.out-of-the-money III.a LEAPS option

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters

If the stock price follows a random walk, successive price changes are statistically independent. If σ² is the variance of the daily price change, and there are t days until expiration, the variance of the cumulative price change is